India-China conflict and its ripple effect on MSME exports: A once-in-a-lifetime opportunity

Snapping all trade ties with China is easier said than done.

Trade, Import and Export for MSMEs: An expansionist move by the Chinese at the Line of Actual Control (LAC) amid the Covid-19 pandemic spurred the Indian government to caution its businesses to prepare to source locally and export to countries besides China to mount economic pressure on its neighbour. As far as trade relations are concerned, India and China are already at war with each other. The Indian government’s push via its ‘Aatmanirbhar Bharat’ movement is both to caution China against meddling with India for its land and to attract foreign money from companies who hold a no-trust vote towards China for the coronavirus pandemic. At the heart of these trade tensions is the future of India’s MSME sector, which accounts for over 40 per cent of the country’s exports, and contributes 30 per cent to India’s GDP growth.

Where’s Opportunity

The Indian government’s diktat to China not to invest in India’s MSME sector and imports from the country to be discouraged is an opportunity for domestic manufacturers to become export-ready by leveraging the gap the trade-off has created. An import duty hike or non-tariff barriers can make input cost for raw materials expensive by 10 per cent to 40 per cent. Indian MSMEs, which develop better-quality products compared to the sub-standard quality Chinese products, will be in a position to establish dominance in the unorganized retail sector. Sustained credit flow and technology will play a big role in engaging with manufacturing players who decide to possibly shift to India amid sharp criticism of China over the spread of Covid-19.

The trade tensions between India and China can result in two scenarios: first, where India builds domestic capabilities to develop raw materials’ manufacturing as well as storage infrastructure that will benefit the country in the long run. This can be achieved by the help of the government-led sops and incentives in the form of policy reforms that accommodate ease of credit to MSMEs. Secondly, India can attract enough foreign capital to be able to manufacture and turn into an export hub similar to China and use the coronavirus pandemic contingency to strengthen its export capabilities.

This once-in-a-lifetime chance to upgrade manufacturing capacity at par with China and develop a robust manufacturing and supply chain network must not be missed by India’s MSMEs that have understood the need to reposition their businesses digitally.

The global economy is set for tectonic changes post the coronavirus shock. Both quantity and quality will determine whether India wins or misses the coronavirus opportunity to take a significant portion of China’s trade. Indian government’s ‘Make in India’ and ‘Assemble in India’ too hold promise to attract global manufacturers and could potentially boost exports. Indian MSMEs could benefit from potential collaborations and partnerships.

Challenges to Combat

Apart from India, global manufacturers are looking to shift base from China to low-cost manufacturing hubs such as Bangladesh and Vietnam for textile and electronics. Even countries like Taiwan and South Korea are seen as alternative manufacturing centers armed with advanced technology. What India could do to compete with these nations is rapidly adopt technology to strengthen high-end product manufacturing and process capabilities. Indian MSMEs’ agility in comprehending how technology innovation benefits their businesses and enables them to be more global, and address global requirements is a result of the challenges that the coronavirus pandemic brought forth.

A large number of coronavirus-hit MSMEs lack the confidence to challenge Chinese business prowess and are wary of high raw material cost for imports from South Korea, Japan, and Europe. To ease these concerns, the government may need to work collectively with stakeholders to transition a move from Chinese raw materials to other countries in a phased manner as compared to suddenly banning Chinese procurements. A planned movement will give Indian MSMEs the time and scope to adapt to technology, develop local-sourcing capabilities, and fully understand which trade partners would benefit their businesses.

Who Can Help MSMEs

As Indian MSMEs get ready to ease operations by the adoption of technology, the front-runners for aiding them would be tech-driven companies who have robust tech processes in terms of credit financing, products procuring, factoring, and invoicing. The winner in this race to grab more business opportunities from aggressive Chinese counterparts will be the enterprises willing to embrace technology at a lightning speed. Many Indian startups are at the forefront of advanced technological acumen, which could benefit MSMEs, and long-term associations would benefit all stakeholders.

As the Indian government looks to ease taxation and address inconsistencies in the import-export sector, the country’s MSMEs need to reduce compliances by collaborating with trusted trade finance companies who have experience in dealing with partners worldwide to benefit from collective learning and grow together.

India’s total trade with China declined $16.55 billion in April-June 2020-21 from $21.42 billion in April-June 2019-20. This trade deficit could further reduce with lesser dependence on imports in sectors such as pharmaceutical, textiles, electronics, chemicals, automotive components, agriculture-based products, etc. However, snapping all trade ties with China is easier said than done. To use the twin opportunity of national protectionism and the worldwide unrest with China on handling the coronavirus situation, Indian MSMEs need to get to action now.

Pushkar Mukewar is the Co-Founder and Co-CEO of Drip Capital. Views expressed are the author’s own.